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Mr. Gates and the Hunt for Search
Yahoo's grab for Overture seemed to outflank Microsoft. But
wait: Bill's search-engine strategy is not what everyone thinks.
By John Battelle, September 2003 Issue: Business 2.0
Like TV broadcasting and the automobile business before it, the
Internet media industry has now resolved to the Rule of Three.
Of the scores of companies that battled for dominance in the
1990s, only Yahoo (YHOO), Microsoft (MSFT), and Google remain
serious contenders. They, along with AOL (AOL), own the lion's
share of Internet advertising and worldwide English-language
traffic. Yahoo's recent acquisition of Overture (OVER)
reaffirms, if the idea needed reaffirming, that Internet media
obeys the same urge to consolidate as every other industry.
It proves something else, too, about this phase of the
Internet's evolution. The key driver is no longer content, but
intent. The business is no longer about selling advertisers the
eyeballs you've caught with news, images, games, and the like.
It's about selling users at the moment they make their online
desires known through their search queries. In plain terms, the
engine of Internet media is once again search. (That, by the
way, is why I'm leaving AOL out of this discussion. Preoccupied
with many other problems, the dial-up giant -- a corporate
sibling of this magazine -- is leaving its search functions to
Google.)
Search will account for more than $2 billion in advertising
sales this year. It's predicted to grow at 35 percent annually,
to nearly $7 billion by 2007, according to U.S. Bancorp Piper
Jaffray. Beyond the numbers, search has become the most
important commercial application on the Web. Not only is it the
defining task of any portal, but it's also the preferred doorway
into e-tailers like Amazon (AMZN), as well as auto, home, and
dating sites. An online consumer business can no longer afford
to have poor search capabilities.
By the middle of last year, both MSN and Yahoo had realized that
they needed to rethink their search strategies. To profit from
search, a company needs three elements, all of which Google
already had. First, you must have high-quality "algorithmic"
search, which attempts to match users perfectly with what
they're seeking. For years MSN and Yahoo have outsourced
algorithmic search to companies such as Inktomi and Google.
Second, you need a paid search network, which allows you to
display links to paying advertisers alongside your editorial
results. Both MSN and Yahoo had outsourced this to Overture. And
third, you need your own distribution. In other words, you must
own the site where the consumer makes his or her query and the
results are displayed. Until recently this was the only element
that either Yahoo or MSN truly owned.
By buying Inktomi last December and then Overture in July, Yahoo
has taken control of the two missing elements, which arguably
leaves MSN in the worst position of the Big Three. Besides
having the only site of the three that is consistently
unprofitable, it is outsourcing both its algorithmic and its
paid search technology to a major competitor. Not exactly an
ideal situation.
But aside from Netscape's early investors, not many people have
ever gotten rich by underestimating Microsoft. Earlier this
summer, just before the Yahoo-Overture deal was announced, big
news began rippling through the Silicon Valley grapevine: Bill
Gates had seen the next great opportunity, and its name was
search. Microsoft had recently posted scores of new job openings
in the field, and a new "MSNbot" had been spotted crawling the
Web. Within a week Microsoft officials had confirmed the rumor,
and Valley dwellers once again invoked Netscape, this time as a
verb -- as in "Microsoft is about to Netscape Google."
But Microsoft isn't out to crush Google, at least not directly.
The best way to think about anything Microsoft does is to ignore
the market leaders it might squash along the way and focus
instead on the market lead it already commands. That has a
one-word name: Windows.
Put another way, Microsoft's interest in search, or Internet
media in general, has a lot less to do with beating Google or
Yahoo and a lot more to do with ensuring that the next version
of Windows has enough features to persuade customers to pony up.
For now, potential search profits are a rounding error compared
with the billions the company could earn from a new version of
Windows.
What makes search an attractive battleground for Gates, apart
from its importance to Internet media, is that it's still in its
infancy as a computer science problem. That means there are
extraordinary opportunities to create great new applications in
the field. "Fifty to 60 percent of consumer search queries go
unanswered by any search engine," points out Lisa Gurry, group
product manager at MSN. "No one is successfully doing [search]
today," she adds, echoing a view expressed by many engineers who
specialize in search.
If Microsoft acts true to form, it will define "successfully
doing search" as "making search a feature of Windows." Whether
this is a wise approach remains to be seen, but the next Windows
upgrade -- code-named Longhorn -- is planned for 2005 (it was
originally due next year). And while Microsoft won't say it
quite this way, it's clear that one of Longhorn's most
marketable new features will be its integrated search functions.
Sources both inside and outside the company say that Longhorn
will blend local (your own hard drive or server) and Internet
search, and will even go so far as to crawl your favorite
websites overnight and cache them on your hard drive, creating
an extraordinarily fast Internet experience.
If all Microsoft wanted was a great search engine over at
MSN.com, it might as well keep its current arrangement with
Yahoo/Inktomi/Overture -- or fire a shot across the bow of Yahoo
CEO Terry Semel and cut a new deal with Google. MSN's contracts
with Inktomi and Overture are staggered across multiple markets
and product offerings, and are set to expire by 2005 at the
latest. Microsoft could probably wriggle out of them all should
it wish to -- its execs have already taken to referring to their
Overture partnership in the past tense. But in the short term,
the company will likely continue outsourcing its search
functions while armies of Microserfs labor away on integrating
search into Longhorn.
Given the critical nature of search, it makes sense for
Microsoft to develop its own code. CEO Steve Ballmer may
accelerate the pace through acquisition of a second-tier search
engine like FindWhat, LookSmart, or Ask Jeeves -- all three
companies saw their stock prices jump in response to the
Overture deal. But the most far-fetched scenario has Microsoft
acquiring Google. While Google founding lights Larry Page and
Sergey Brin privately say such a deal will never happen, Ballmer
& Co. have $49 billion in the bank, and upon closer inspection,
the two companies are not that incompatible. Both have
engineering-driven cultures that prize intelligence over all
else. To further cloud the horizon, the Yahoo-Overture deal
won't be final until late this year. There's always the chance
that Microsoft -- or someone else, for that matter -- could make
Overture a better offer.
So where does that leave Google? It never pays to underestimate
the leverage that Redmond wields with its Windows monopoly, but
once search is integrated into Longhorn, the folks at Google
should be smart enough to learn from Netscape's mistakes and
step quickly out of Microsoft's ponderous path. They can simply
play to their strength, offering all those frustrated Windows
users a better way to find things on the Web. Chances are good
there'll always be a market for that.
To learn more about how you can take advantage of the trends
happening in search,
contact
one of our
Internet Marketing Consultants about an
Internet
Marketing Solution that can help grow your business.
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